- Sales driven by prices rather than volumes
- Firm gaining share in premium products
- Full-year forecasts confirmed
There can’t be too many retail chief executives who can say they are ‘really pleased’ with their firm’s progress this year, but Ken Murphy of Tesco (TSCO) is one.
The grocery boss delivered an upbeat first-quarter trading statement and reiterated the group's profit guidance for the full year, describing it as ‘well prepared for the months ahead’.
Tesco shares, which have outpaced the FTSE 100 this year with a gain of more than 15%, eased back 1.5p or 0.6% to 263p in mid-morning trading.
‘RELENTLESS’ FOCUS ON PRICE
The group posted an 8.2% increase in like-for-like sales to £14.8 billion for the quarter to May, led by an 8.8% rise in UK and Irish sales to £13.8 billion.
The chief executive flagged Tesco’s leading role in cutting prices on essentials such as bread, pasta and milk by upwards of 10% in recent weeks, as inflation in cereals and dairy products eased, helping to drive sales volumes.
On a related note, the strong performance of its large-scale stores was a feature with like-for-like sales up almost 10% as more customers bought groceries in bulk to batch-cook in order to save money.
As well as meeting the discounters Aldi and Lidl head-on with its price-match offer, everyday low prices and Clubcard deals, the company is gaining market share at the top end of the market with its Finest range.
The latest quarter marked its ninth consecutive period of switching gains from premium retailers, with Finest sales up 14.9% thanks in part to the launch of over 100 new product lines.
While sales in Central Europe looked light, rising just 1.1%, the performance was in line with management expectations after last year’s exceptionally strong first quarter which saw government stimulus measures in several key markets including Hungary.
Meanwhile, the Booker wholesale business put in another strong showing with like-for-like revenue up 8.4% thanks to better-than-expected growth in catering sales through its ‘Fast Food Club’ initiative.
WHAT DO ANALYSTS THINK?
Given Tesco management left their full-year guidance unaltered, there was little for analysts to do except reflect on the stock’s appeal.
Clive Black, head of research at Shore Capital, highlighted the firm’s ‘sound earnings growth, alongside capital discipline that covers an attractive dividend yield of 4.1% and a recurring buyback currently amounting to £750m’.
‘Sustaining this cash compounding focus should, to us, be the mechanism to build the stock's rating that on a five-year view should also deliver meaningful capital appreciation.
‘We see Tesco's shares not as ones that will be the subject of rapid price growth as opposed to steady ongoing progress. Such steadiness may make the stock appear a little dull at times but ultimately rewarding for the patient investor’.
Russ Mould, AJ Bell investment director, commented: ‘Perhaps supermarkets have been a bit sluggish in passing on falling wholesale costs, with inflation still the main driver behind Tesco’s sales growth.
‘In other words, it is not seeing growing volumes and that helps explain why the company is not upgrading profit forecasts despite the strong sales performance’, said Mould.
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author (Ian Conway) and article editor (Martin Gamble) own shares in AJ Bell.
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